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Posts Tagged ‘Port Hedland’

Mining Week 23/’12: Investment dilemmas for BHP and Fortescue

June 3, 2012 Comments off

Top Stories of the Week:

  • Rumour around retention plan for Xstrata executives
    • Several major shareholders have voiced discontent with the approx. $370mln retention bonuses for the top 72 executives of Xstrata that has been made part of the vote on the Glencore-Xstrata merger.
    • Sources: Financial Times 1; Financial Times 2; Wall Street Journal
  • Australian state governments fight for BHP investment
    • BHP Billiton received environmental clearance for the expansion of Port Hedland’s iron ore harbour. The project could cost around $20bln up to 2022 to increase export capacity to 350Mtpa.
    • The government of Southern Australia is pressuring BHP to start the expansion of its Olympic Dam copper/uranium project before the end of the year, threatening not to extend the permits. The Olympic Dam expansion is one of the key projects that might be cancelled or delayed as BHP tries to limit investment and return money to shareholders.
    • Sources: Bloomberg; Business Spectator; Financial Times
  • Fortesque worries about debt servicing
    • Fortescue, Australia’s third largest iron ore miner, is close to completion of an expansion that will enable it to export 155Mtpa iron ore.
    • The CEO of the company has indicated that it will focus on repayment of debt before undertaking further expansion. The company has received negative feedback from investors because of its high gearing. Its Debt/Equity ratio stands at approx. 45%, versus 26% for Vale and Rio Tinto and 15% for BHP Billiton.
    • Sources: Fortescue media release on expansion progress; Wall Street Journal; 9News

Trends & Implications:

  • If BHP decided to press on with the Port Hedland expansion at the expense of large development projects in other business units that would be a next sign that the supermajors are preferring the relatively predictable iron ore market over further diversification. Both Rio Tinto and BHP Billiton are considering sale of their iron ore business, BHP is in the process of reviewing the options for its Australian manganese operations, and Vale reached a deal last week to dispose its coal operations.
  • The proposed retention bonuses for the top 72 managers of Xstrata add up to around $370mln, an average of some $5mln per person, 4% of last year’s profit, roughly 1-2 annual executive salaries per person, about $0.8 per share, or some 0.1% of share price. The bonuses are set up to keep the managers with the company for at least another 3 years. Even though we are talking about a lot of money that could trigger ethical debate about the executive pay in the industry, the shareholders hardly have any ground to protest the plan from a business perspective. Retention of the top managers after the merger should certainly enable the company to get a quick payback on the $370mln.

©2012 | Wilfred Visser | thebusinessofmining.com

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Rio concedes BHP ore merger faces hurdles

October 6, 2010 Comments off

“Rio Tinto has conceded that regulatory obstacles are mounting against its ambitious plans to merge its Australian iron ore operations with those of BHP Billiton, its competitor.

The admission came amid growing speculation that the proposed joint venture was being stymied by regulators amid strong opposition from the global steel industry, which fears the plan would give the two multinational miners increased pricing power.

Competition regulators around the world have expanded their scrutiny of the joint venture and pushed back deadlines on their rulings. One Australian media report has claimed the joint venture, first proposed in June 2009, was ‘dead’.”

Source: Financial Times, October 5 2010

Observations:

  • The JV for Pilbara was planned in order to produce more tonnes of iron ore faster, giving both Rio Tinto and BHP Billiton a competitive advantage over competitor Vale.
  • Australian iron ore accounted for 42% of the total iron ore imports of China in 2009. Rio Tinto ships ore from the Western Australian complex via various ports in Dampier and Port Walcott, while BHP uses a port facility in Port Hedland.

Implications:

  • Regulatory approval is unlikely to be given as the production JV would give the companies too much power in the iron ore market in the region. The dominant position of the big 3 and the strong ties the JV would give BHPB and Rio Tinto would increase the risk of price fixing.
  • European regulators typically approve a merger if the new company does not exceed a market share of 40%, and set conditions in case the share is between 40% and 50% depending on the synergies the companies can achieve. American regulators evaluate the level of consolidation in the industry, using the so-called HHI-index. In both systems the JV would certainly exceed the allowable thresholds for parts of the iron ore market. Apparently the Australian regulators agree with this view.

©2010 | Wilfred Visser | thebusinessofmining.com

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